Buy low, sell high. It’s obviously advice. In practice, it isn’t as easy since it sounds. How will you know tomorrow the purchase price won’t drop another 10% or 30% for example? In the event that you bought today with all the current cash accessible also it drops another 50% tomorrow, no quantity of self-kicking would relief the pain inflicted. Take Leucadia for instance. It first revealed its stake in AmeriCredit (NYSE: ACF) early in January 2008. By May, it includes acquired approximately 26% of outstanding shares at the average price of $13/share. When Fitch affirmed AmeriCredit’s negative outlook, its shares promptly went right into a free fall and didn’t stop until it lost about 37% of its market cap. Even while, Leucadia stayed for the sidelines. Recently, Leucadia finally bought the final 4% from the outstanding shares (at typically $7.63/share), hitting the utmost of outstanding shares it could own predicated on its agreement with AmeriCredit. Nobody may have anticipated that significant a drop. The simple truth is nobody knows.
Clearly, he didn’t expect the purchase price to drop much.
The best defense against such devastating drops would be to make sure you have a large margin of safety. Sure, despite having a large margin of safety you may still face an enormous drop following the purchase. However, if you’re confident about your analysis, it is possible to take delight in the truth that the drop is only a temporary paper loss. Considering that we have no idea the bottom, just how much should we invest whenever we have sufficient margin of safety? Should we go all out? Should we restrain some in the event it drops further? Considering Leucadia’s transactions, it generally does not seem like there is a formula to find out how much to get once you hit a particular price. I’m sure Ian Cumming wished he may have bought all of the shares in a 37% discount. Clearly, he didn’t expect the purchase price to drop much. Had he known, he’d have waited.
Institutional investors like Leucadia and Berkshire usually buy shares in chunks rather than all at one time. The sheer level of shares being bought would cause the purchase price to jump. If you are investing in a $50 million stake, a rise of 1% in cost can cost you a supplementary $500k. Nearly chump change. For all of us individual investors, having less such buying power is actually a blessing in disguise. The quantity we cope with is indeed small it barely affects the purchase price. So, we need not buy in chunks. But, could buying in chunks lessen the common cost? Buying in chunks is really a double-edged sword. It could only decrease the average cost if the purchase price is falling. If the purchase price moves in another direction, it eventually ends up increasing the common cost. Also, remember the frictional cost of commissions. The best threat of buying in chunk is may very well not realize the purchase price has already been at its bottom. Once the tide rises, it could continue steadily to rise rather than go back to that lowest price.
And 25 years from now, you’ll spend the others you will ever have lamenting to the friend the method that you might have been a billionaire had you purchased that stock with all $10,000 you’d. Buying stocks is often a tough decision. Spend all of your cash and you also risk devoid of cash to invest if the purchase price drops further. Spend inadequate and you also risk missing the opportunity to dethrone Warren Buffett for the Forbes 400 Richest. Considering both sides from the coin, the potential risks may seem well-balanced. The simple truth is the former is less painful should it materialize. Actually, Buffett has made the mistake in the latter and considers it one of is own biggest mistakes in his investment career. He admitted sucking on his thumb when Wal-Mart was selling over a discount back 1999. He estimated the error cost him $8 billion. In the event that you skip the ride, the inflicted pain could easily get worse because the price rises. Alternatively, in the event that you bought around you could, there’s a floor for just how much the purchase price could fall. So, in order to avoid future heartaches, I’d rather buy with all the current cash accessible once the opportunity occurs. Once the price falls further (Yes, it has happened certainly to me numerous times.), I find that I’ve some cash accessible because like everybody else, my income produces some incoming cashflow. THEREFORE I buy more. Am I completely off base here? What’s your strategy in buying stocks?